Question
1. Suppose you were offered a loan. What
would make you more inclined to accept
it?
a) a decrease in the loan’s interest rate?
b) a decrease in your discount rate?
2. Why does the IRR of the following cashflow not exist?
– Pay $250 now and pay $100 in two years
Potential Projects (N p489)
1.
2.
3.
4.
5.
6.
7.
8.
9.
Cost $100k, IRR=20%
Cost $200k, IRR=15%
Cost $50k, IRR=25%
Cost $100k, IRR=20%
Cost $100k, IRR=20%
Cost $100k, IRR=18%
Cost $300k, IRR=10%
Cost $300k, IRR=12%
Cost $50k, IRR=14%
• Budget $650k
• MARR = IRR of
highest ranked
unfunded project
Summary
• IRR = d

NPV(d) = 0
• For investments: NPV(d) > 0  IRR > d
• For loan: NPV(d) > 0  IRR < d
• MARR = “Minimum Attractive Rate of Return”
– discount rate
– “external rate of return”
– rate of return of best external alternative
• NPV > 0 implies
– project worth doing
• Usual criterion:
– alternative with largest NPV is best
More…
• Investment project cashflows
– first negative then positive and NPV(d) is …
… decreasing
• NPV(d) increasing for loans
• IRR
– Don’t need MARR.
– Can be used in capital budgeting to set MARR.
– Problematic when cashflows switch signs more than once
(or never)